Case Studies
A Successful Sole Proprietor with a Growing Tax Problem.
E (name redacted) is a 34 year-old self-employed professional. She had been filing her taxes as a sole proprietor. Her income has increased over the past several years and taxes are taking a larger bite. She came to us for help.
Our Services
We reviewed E’s last 2 years of tax returns and asked about long-term goals. Her main goal was to remain independent for the foreseeable future and to accumulate some savings. We analyzed the tax effect of continuing as a sole proprietorship for the next 3 years versus as a Subchapter S Corporation.
The Results
We demonstrated the potential tax savings that she would achieve with a Subchapter S Corporation rather than as a sole proprietor. The tax savings would significantly exceed any additional administrative costs as a result of her incorporating.
Since E is in her 30s we suggested she consider a Roth Solo 401K. She has been contributing to a Roth IRA, but soon the ability to do so will be phased out by her increasing income. However a Roth Solo 401K would allow her to put even more annually into a Roth retirement vehicle and continue her Roth strategy.
High Income Middle Aged Couple with W2 Wages and Restricted Stock Options.
H and M have faced several years of large tax balances due each year. H has been using one of the on-line tax preparation packages. This couple came to use wondering how we might be able to help.
Our Services
Having a large balance due at tax time is a challenge for couples at any income level. As your income goes up many common tax breaks or deductions get phased out. And higher tax brackets present unanticipated challenges. One of the advantages of using a tax professional is the ability to assist with tax planning.
The Results
By working with H and M throughout the year, we monitored their year-to-date income on a quarterly basis. H kept us informed of his stock options that were being exercised, and we were able calculate potential tax liability and provide estimated tax payments to help their budget. We demonstrated the marginal tax rates the couple was facing as more and more options were exercised during the year. As a result the couple avoided drifting into the higher federal and state tax brackets. And by paying estimated tax payments avoided that big tax hit at year-end.
Young Couple Considering Purchasing a Rental
S and J (40ish couple) were considering purchasing a four unit rental property in town. They had heard how rental properties were good investment and wanted to understand how it might affect their taxes.
Our Services
We frequently deal with real estate property questions. A number of our clients own multi-unit rentals, rental cottages, or sometimes rent out their vacation property. We were comfortable going over the pros and cons.
The Results
We spent some time with S and J explaining what deductions are allowed for rental properties, and how depreciation works. We also reviewed their tax return and noted that they were both IT professionals who made above average income. That led to a discussion about the passive loss rules with rental losses. We explained that if they were considered “real estate professionals” the tax effect would be different on their tax return. Since they were not real estate professionals S and J ended up passing on the multi-unit building, but started looking a possible vacation property that had rental potential.
